YAHAPALANA AND THE REPUBLIC OF CHINA Part 4Posted on August 10th, 2017

KAMALIKA PIERIS

Yahapalana was planning to push China firmly out of Sri Lanka and hand Sri Lanka over to India and America. Yahapalana thought that it would be easy to shake off China because Yahapalana was under the secret protection of USA. But Sri Lanka owed China money and USA could not cough up the cash needed. Yahapalana could not raise funds from the world market either, because two international ratings firms, Fitch as well as Standard and Poor had reduced Sri Lanka’s credit rating in February and March, 2015.

Unaware of this, Yahapalana government had attacked China heavily before the election. UNP leader Ranil Wickremesinghe declared in December 2014, that the Colombo Port City Project would be scrapped immediately after Yahapalana came to power. Yahapalana halted all Chinese-funded infrastructure projects including construction work in the Port City once it came to power in 2015.

Then Yahapalana found that things were not so simple. China could not be dislodged due to the contracts entered into. Soon after the Port City project was suspended, Chinese Ambassador Yi Xianliang met Prime Minister Wickremesinghe and Foreign Minister Mangala Samaraweera and told them firmly that Yahapalana must respect bilateral agreements and contracts and must recognize the interests of its foreign investors. China pointed out that a 125 million USD penalty was demanded by the Chinese contractor for stopping the work on Port city.

Yahapalana breezily wanted China to reschedule the existing loans amounting to about USD 5 billion and extend fresh loans. President Sirisena went to China to discuss this, Prime Minister Ranil Wickremesinghe followed with two visits. But China refused .These were binding agreements, said China, the projects must continue.

Yahapalana government had no option but to resume the port City project one and half years after they stopped it. The ‘white elephant’ Hambantota port deal also needed attention. Both projects restarted, greatly enlarged and China has now got even more entrenched in Sri Lanka, observed critics. Just two years after Yahapalana came to power, ‘Beijing’s influence is on the rise again’.

Under Mahinda Rajapaksa, the Colombo Port City was to be an offshore city of 230 hectares, built on reclaimed land starting from Galle Face Green. President Rajapaksa and the Chinese President Xi Jinping launched the project in September 2014. The construction, including reclamation was given to China Harbor Engineering Corporation. In return this Corporation would get 20 hectares of the new land on free hold base and the rest on a 99 year lease.

The Port City would have a Central Business District, with deluxe hotels and apartments, also additional real estate, a marina, boulevard, sports complex including a mini golf course and a night racing track. There would be an Estate Management Company fully owned by the government to manage the common areas of the Port City.

Yahapalana gave Port City a new name, ‘Colombo International Financial City.’ This would be an international commercial and financial hub having its own legal system based on English law and strategically located between Singapore and Dubai. The property would belong to Sri Lanka as a part of the District of Colombo and be under the Urban Development Authority.

The project would be handled by the China Harbor Engineering Company. The land reclamation process will be completed by 2018 and opportunities will be provided for investment and construction before 2019. China would be given the City on 99 year lease with a possible extension for another 99 years.

This Financial City of 560 acres would be divided into five sectors. A ‘Financial District’ on 40 hectares accomodating11,000 population, ‘Central Park’ on 35h for 10,000 people, an ‘island’ on 95h for 26,000 , an ‘international island’ on 85h for 23,000 population and a ‘Marina’ on 15h for 5,000 people. 50 % of the land would be allocated for housing, 30% for commercial offices and the rest for other activities.

The Financial City will be a major income earner and an employment provider for Sri Lanka, said Yahapalana. There will be offices, 21,000 residential apartments, four sites for hotels, parks, a marina, and entertainment facilities. There will be no fancy attractions of the kind Dubai boasts of, but it will be a world class Smart City.

Colombo is not only South Asia’s cleanest and the most livable city, it is also the capital of a country which has no quarrels with any of the nations in South Asia. That makes Colombo an ideal place to create and run a regional commercial hub, said the Chinese firm. It will have investments from all parts of the world and not necessarily from China. We are positioning the City as a hub to the whole of South Asia.

However, the Financial City will be primarily serving the Indian market which is the single largest in the total South Asian market of 1.7 billion people, continued the project’s Chinese manager. Indians who want to park funds abroad could do it in the Colombo Port City, rather than in Dubai or Mauritius, as Colombo is the nearest and also culturally compatible.

India has dropped its opposition to the project. Indian businessmen and government officials have realized that the Financial City is nothing but a commercial venture in which Indians are welcome to invest. The Chinese agents had met Indian entrepreneurs and addressed top Indian real estate developers at their conference held in Shanghai. Chinese Ambassador in Sri Lanka, said four or five top Indian companies have expressed an interest in investing in the Financial City but he would not name them.

Sri Lanka signed an agreement leasing the Hambantota port for 99 years to China Merchant Company. The Concession Agreement signed in July 2017, gives 85% to China Merchants Port Holdings and 15% to Sri Lanka Ports Authority. Hambantota International Port Group will oversee commercial operations and Hambantota International Port Services Pvt Ltd (HIPS) will oversee Common User Facilities, including security operations. 49.3% of HIPS will belong to China Merchant. 42% to the Sri Lanka Ports Authority. The remaining 8.7% will belong to the “Hambantota International Port Group Company” which is 85% owned by the China Merchant Government of Sri Lanka will be fully responsible for National Security.

The Agreement was signed amidst deep opposition particularly from the Petroleum industry trade unions. China does not have exclusive rights to the harbor, assured a peacemaker, Hambantota agreement is a commercial one, not government to government. To pacify the opposition, President Sirisena said that changes could be made to the Agreement, if necessary. The Chinese Ambassador pounced on this remark. The Agreement was a business agreement signed by both sides, so how can it be altered, he asked and what alteration did the President want.

The Agreement gives China full control in all port matters, including port security. Sri Lanka Ports Authority is a minority shareholder in all three companies. The majority shareholder decides the policies and controls the day-to-day decision making. The minority shareholding can be voted out. Therefore, thanks to this Agreement, which is a legal document, China gains control of a complete port at Hambantota with a 5,000 acre industrial park. The area that China gains control over is far bigger than the Vatican City or Monaco, many times the size of Gibraltar and nearly the size of Macau, observed Chandraprema. This is therefore a very important, very strategic gain for China. BBC saw the international significance of this move and featured the Hambantota signing in its World News.

Yahapalana government is now compelled to sign a lease agreement with Sri Lanka Ports Authority (SLPA) as the public partner and China Merchant Port Holdings as the private partner to establish several companies to implement the agreement. Then a new problem will come up.

Investors say that previous (now held-up) agreements they had with the Rajapaksa regime for Hambantota should be honored by the present government. President Rajapaksa had entered into agreements with local and international firms to set up factories in the industrial zone, an LNG plant, and several other development projects. Some of those agreements were government to government and cannot be abrogated.

In 2012 Greenlink Global Consulting, an international firm with Canadian and Chinese links, entered into an MOU with the Board of Investment of Sri Lanka (BOI) for an LNG facility, gas pipe line and power plant project in Hambantota. Greenlink has urged the government to adhere to this agreement. The Ministry of Power and Energy, has been put on legal notice by Greenlink through a Canadian law firm not to consider or entertain any proposal for development of any power project at Hambantota in breach of rights granted to Greenlink.

When Yahapalana called for bids for the lease of the Hambantota port, two Chinese Companies put in bids – China Merchant Co for 99 years on payment of USD 1.12 billion and China Harbor Co for 50 years with a payment of USD 750 million. The more favorable offer was clearly the China Harbour bid and that was what the Chinese would have expected the government to accept. China Harbour had also agreed to pay various harbor charges giving the Ports Authority a much better income than China Merchant even though the up front payment by China Merchant was higher because of the much longer duration of the lease. But Yahapalana accepted the 99 year bid.

Prime Minister Ranil Wickremesinghe stressed that the Hambantota Port would not be a ‘Military Port’. The Agreement precludes any foreign country from using the harbor for military purposes. It is only a commercial operation. We do not want any of Sri Lanka’s harbours to be used for military purposes other than that of the Sri Lanka Navy. Security will be handled by the Sri Lanka Navy. Sri Lanka Police, Customs and Immigration would be in charge of their subjects, he assured.

However, any warship can come into the Port, provided the Government of Sri Lanka agrees to it,” said the Prime Minister. Some believe that all military activity should have been prohibited in the Hambantota Port. This is particularly in view of fears entertained by western powers of China’s military intentions. Diplomats of at least two important countries have briefed many ministers in the government about these fears and their concerns. Premier Wickremesinghe reassured a Japanese audience that any violation of conditions in the agreement would mean that the Sri Lankan government could take over the Port without payment of compensation.

However, analysts point out that there is nothing in the agreement to prevent China using Hambantota as a supply base to refuel or re-provision Chinese military vessels. China will no doubt use Hambantota harbor to provide fuel, water and food to all the Chinese military vessels in international waters in the Indian Ocean. . Thanks to the wording of the Agreement Chinese warships and submarines can nip into Hambantota and leave after apologizing for their presence with no major damage done to the Agreement.

There is nothing in the Agreement about sea marshals either. Chandraprema pointed out that even a Chinese General or Admiral could come to Sri Lanka wearing the label of a sea marshal and he will have to be welcomed in Hambantota not just by the Chinese company running it but by the Sri Lankan government as well. There is no restriction in International law on the number of sea marshals that a ship can have or the kind of weapons they can use. Given all this, it will not be possible to prevent the use of the Hambantota harbor for military purposes, Chandraprema concluded.

Sri Lanka is not interested in placing any restrictions on the Chinese bringing in military vessels into Hambantota. Military use means money. If the Chinese military was going to bring business to the Hambantota harbor, why object? We should be actively encouraging them to bring as many military vessels into Sri Lanka as possible and if possible take up permanent station here so as to counterbalance India, added Chandraprema.

Sri Lankan government would have been aware of the fact that China had a plan for constructing sea ports in strategically important locations in the littoral states of the Indian Ocean and several sea ports such as Gwadar on the southern coast of Pakistan and Sittwe in Myanmar had already been constructed, said Premaratne. These sea ports were aimed at containing India. China’s state owned newspaper Global Times had warned that Pakistan could no longer provide china a strong foothold due to its unstable state and that as a result Lanka was of great strategic important to China said Don Manu.

With Hambantota, the Chinese have succeeded in completing their encirclement of India decades sooner than they expected, observed Chandraprema. The Chinese government would not have imagined even in their wildest dreams that they would be able to achieve this so soon, observed Chandraprema. China never expected to get the Hambantota harbor on a 99 year lease from the Yahapalana government. Thanks to Yahapalana, the Chinese have now got a permanent base in the Indian Ocean. China is now able to supervise the sea lanes in the Indian Ocean right up to the South Pole. This has brought China that much closer to overtaking the India-West axis as a world power.

What they would have had under the Rajapaksa government was at most a friendly and cooperative government. The Rajapaksas were on principle against privatization and they would never have gone so far as to lease the Hambantota port to a Chinese company for 99 years. Under Rajapaksa the industrial zone and the harbor would have been controlled by the Ports Authority while harbor operations would have been handled by the private sector as is the case now in the Colombo port. . That was as far as the Rajapaksa government would have gone.

For a few heady months, after January 2015, it appeared as if the Indians had won the day with the new government stopping not just the Colombo Port City project but all Chinese funded projects in Sri Lanka. Now however, the very government that the Indians helped bring into power has not only restarted the Colombo Port City project but also given the Hambantota port to the Chinese on a 99-year lease, commented Chandraprema.

If India thought that their security was endangered because of the influence that the Chinese had during the Rajapaksa government, now India has practically no security. Even obtaining control over the Trincomalee harbor means nothing because all Indian ships calling over at Trincomalee will have to go past the Chinese free port in Hambantota. Trincomalee may have been the strategically important port earlier but today, it is Hambantota. India is well and truly encircled by Pakistan and Hambantota. The Chinese are here to stay and basically to do just as they please and the Indians can do nothing to stop it, concluded Chandraprema.

However, Chinese Ambassador to Sri Lanka, Yi Xianliang, assured Sri Lanka that China will never use Sri Lanka’s strategic location in the Indian Ocean for its strategic and security needs. We do not have any navy soldiers or any other soldiers in Sri Lanka. We have no intelligence personnel based in Sri Lanka either. We have no such people present in Sri Lanka except the Chinese diplomats and I am the representative of China to Sri Lanka, the Ambassador said. We support Sri Lanka’s development. You can check what China has done in Sri Lanka in the past. We have built infrastructure, hospitals, airport and harbor. Sri Lanka also is the first country to get the largest donation and financial assistance from China, he said. (Continued)

This essay concludes with an appendix containing extracts from essay by Nivard Cabraal published in Sunday Island 9.4.17

APPENDIX

According to initial plans, during the Rajapaksa presidency, the Hambantota Port, when completed, would have consisted of four terminals and 12 berths. This new Port was meant to be a “free port” covering an area of 2,000 hectares where goods could be manufactured and shipped, as well as trans-shipped, with minimum delays. The first phase of the project became operational in 2011, and the trans-shipment of vehicles began in 2012, with 70% of the vehicles that were discharged in Hambantota being trans-shipped to other destinations. By 2014, 335 vessels called at the Hambantota Port, with 295 docking in 2015. The investment in the construction of the Port up to 2014 was approximately USD 450 million for the first phase, USD 70 million for the bunkering facility, and USD 802 million for the second phase, totaling USD 1,322 million. This cost was financed as loans from China.

It is globally acknowledged that investments in projects such as Ports are strategic long term investments that provide enduring economic benefits for centuries, and that a new Port cannot be expected to record huge direct financial profits in the first few years. Until then, the government expected to utilize the revenues of approximately USD 100 million that the Port Authority would have generated from the Colombo East Terminal to be applied towards the loan and interest payments due on the Hambantota Port construction loans. Accordingly, the plan was to financially break even within 10 years.

Nevertheless, indicating the massive potential of this vital investment, it is noteworthy that the Hambantota Port had commenced making early profits as reflected by the operating profit of about Rs. 900 million in 2014, and Rs 1,200 million in 2015.

In keeping with the overall project vision, the Rajapaksa government also entered in to a Supply Operate and Transfer (SOT) management contract for 40 years with a joint venture between China Harbour Company and China Merchant Company to supply equipment such as cranes, and to operate the Hambantota Container Terminal. In return, the Hambantota Port was to receive a lease rental of USD 35,000 per hectare per year for the 56 hectares in the Container Terminal (a total of approximately USD 2 million per year), a royalty of USD 2.50 on every container loaded or unloaded, a wharf rage of USD 30 per container for cargo brought into Sri Lanka, as well as other usual harbour charges. Hence, as per this ownership and management model, all terminals in the Port and the 2,000 hectare industrial zone, other than the Container Terminal, were to be controlled by the Ports Authority, and the Authority would have derived substantial income from the cargo passing through their numerous terminals, as well as enjoyed the capital growth derived by the project over the years.

Unfortunately however, as soon as the new government took office, it made some reckless decisions, possibly in their haste to discredit the previous government and to portray the Port as an “expensive swimming pool”, a label they attached to the Hambantota Port from the time it was built. First, the government unilaterally abrogated the management contract for the Hambantota container terminal that was entered into with China Harbour Company and China Merchant Company. Second, the government halted the development of the Colombo East Terminal, which, had it been proceeded with, would have generated revenues of more than USD 100 million a year from 2016 onwards. Third, the agreements that the Rajapaksa government had signed by the end of 2014 with several foreign and local companies to lease out about 80 hectares in the industrial zone at a minimum rate of USD 50,000 per year per hectare, were abrogated by the new government, thereby imprudently interrupting the planned revenue streams, which placed the entire project at grave risk.

In the meantime, the government continued to publicly claim that the Hambantota Port was a “white elephant”, and carried out a massive propaganda effort to mislead the people that the Hambantota Port had to be “privatized” in order to raise the money to pay the loans that were taken to build it. Together with that propaganda blitz, the government also made plans to privatize the harbour operations, as well as to “lease” the most valuable landlord rights over the entire 2,000 hectare free port, so that whoever is successful in securing the lease, will be able operate the entire Port and have complete control over the industrial zone as well.

No other income is to accrue to the government or the Ports Authority for the next 15 years, and even thereafter, the Ports Authority will receive dividends only on their 20% stake; and that which too, would be receivable only if profits are made and dividends are declared by the majority Chinese shareholder. In addition to all these benefits, a 44 hectare artificial island outside the Port has also been included in the deal. That is not all. As is known, the original Hambantota Port master-plan had provision for the construction of another 20+ berths in the years to come, and the rights over those berths too, have been promised to the lessee, according to the information trickling in.

In this background, it is hardly surprising that a great deal of public protests have started against this privatization process. It is however hoped that these objections are not construed as being against China or any foreign investor. Rather, these protests must be recognized as reactions that concerns Sri Lanka’s sovereignty and the very foundation of Sri Lanka’s future economic well-being. The leasing of the entire Hambantota Port and its surrounding real estate for 99 + 99 years in an island nation, and abrogating Sri Lanka’s landlord rights over a highly sensitive industrial zone to a foreign private company, is an action that will deprive the economy of the massive future potential of this Port, and that too, for a very small consideration.

In addition, it is now known that the government also intends to lease a further 15,000 acres outside the free port exclusively to Chinese companies for 99 + 99 years. While it is obvious that the geopolitical, economic and military ramifications of this ill-advised government decision could embroil the country in a major controversy in the near future, the disruption caused to the people of the area will also be immense and totally unacceptable. That is because the random acquisition of 15,000 acres of land in the close vicinity of agricultural properties and human settlements for unknown industrial activity, would pose tremendous uncertainty, strife and stress to the people who have owned these lands for centuries.

Accordingly, the government would do well to initially attract investments for the area of 2,000 hectares as already demarcated, before attempting to acquire any more lands which would cause serious human and environmental damage. The government must also exert close supervision over the types of industries that are to be operated in the already earmarked industrial zones, the raw material that such factories would use, and the waste that such factories would discharge, so that the lives of people are not affected or disrupted.

In the meantime, it must be recognized that this Hambantota Port privatization issue is not one that can be resolved through the suppression of popular dissent. Instead, the authorities must seriously and pragmatically consider the real and deep issues relating to the long-term economic and financial benefits, the sovereignty over strategic lands and sea area of the country, as well as the human, social and environmental factors. Naturally, therefore, any final course of action relating to the Hambantota free port must be extensively debated in Parliament, while sufficient time must also be given for public consultation.

Finally, foreign investors must appreciate that if they rely too heavily on an authoritative government’s high handed actions to provide them with untenable incentives and other advantages, that they (the investor) too run the risk of a future government withdrawing such benefits and restoring the status quo for the greater long term well-being of the people of Sri Lanka.

END OF APPENDIX

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